Dairy, livestock bright spots in 2014 USDA farm income forecast

Higher livestock receipts will be offset by lower crop income, cutting 2014 U.S. net farm income to $96.9 billion, down over 21% from 2013’s estimate of $122.8 billion, according to USDA’s latest farm income forecast, released Nov. 25.

The 2014 forecast would be the lowest since 2010, but still $16 billion above the previous 10-year average of $80.8 billion. After adjusting for inflation, 2013’s net farm income was the highest since 1973.

USDA’s November forecast for the 2014 farm sector income is considerably less optimistic than the August forecast. Both net farm income and net cash income for 2014 have been revised downward, largely the result of declines in expected crop prices and reducing crop cash receipts.

Net cash income is forecast at $108.2 billion, down 19.4% from the 2013 estimate (see table on farm income indicators). Net cash income is projected to decline less than net farm income primarily because it includes the sale of carryover stocks from 2013. Net farm income reflects only the earnings from production that occurred in the current calendar year.

Other highlights of the report include:

• Crops: Crop receipts are expected to decrease by $27.2 billion (12.3%) in 2014, led by a projected $10.5-billion decline in corn receipts and a $7.9-billion decline in soybean receipts. The annual value of U.S. crop production is expected to decline in 2014 from 2013’s all-time high. A large decline in crop cash receipts will be partially offset by an increase in inventory, as farmers hold crops in storage at the end of the calendar year. Corn production has increased significantly since the 2012 marketing year, with corn exports more than doubling. Soybean production has also increased significantly since the 2012 marketing year, as have soybean exports.

Wheat production, exports, and domestic use have declined since the 2012 marketing year. A decline is expected in fruit and tree nut receipts in 2014, while vegetable and melon receipts are expected to stabilize.

Receipts for some U.S. crops are expected to increase. Rice receipts are expected to rise, reflecting higher anticipated rice prices in 2014. Hay, oat, and potato receipts are also forecast to increase as higher sales more than offset a forecast reduction in prices.

• Dairy & Livestock: Strong gains in U.S. livestock value of production reflect higher prices and cash receipts, easily offsetting a negative value of inventory change. Increases in value are forecast across almost all livestock categories. Livestock receipts are forecast to increase by $25.7 billion (14%) in 2014 largely due to anticipated record prices for beef cattle and milk. Receipts are expected to be up 23% in dairy, thanks to higher prices and increased milk marketings; up 19% in cattle; and 8% in hogs. Price increases are also forecast for turkeys, chicken eggs and broilers. Exports are expected to be up for beef and veal, pork, and turkey; stable for milk; and down for broilers.

• Government payments: The elimination of direct payments under the Agricultural Act of 2014 results in only a projected 4% decline in government payments due to offsetting supplemental and ad hoc disaster assistance payments related to drought (see table on government payments). The continuing drought is expected to generate increased payouts from the Livestock Forage Program (LFP), which is expected to account for over 40% of total direct U.S. government payments in 2014. The large LFP forecast reflects changes to the program in the 2014 Farm Act. These changes raised the annual payment rates per head of qualifying livestock, increased the maximum number of drought months per year used to determine payments, and removed the requirement that producers purchase risk management coverage under the Federal crop insurance program to participate in the Noninsured Crop Disaster Assistance Programs. About 57.8% of LFP payments in 2014 result from the 2012 drought, 30.1% from the 2013 drought, and the remainder from the 2014 drought.

Conservation program payments are expected to increase (12.7%) in 2014. The largest source of payments is the Conservation Reserve Program’s annual land rental payments.

• Expenses: Total production expenses are forecast to be 5.7% higher in 2014, the fifth consecutive increase since last falling in 2009. Production expenses forecast for 2014 would be the highest on record both nominally and in inflation-adjusted dollars. However, the increases in 2013 and 2014 are expected to be significantly less than the increases in 2011 and 2012. The principal reason for the 2014 increase is higher input prices, as reflected by the Production Items, Interest, Taxes, and Wage Rates (PITW) index, which is forecast to rise 4.8% during the year. If realized, total production expenses would constitute 76% of gross farm income in 2014, the highest since 2010, indicating a return to tighter margins.

The largest increase among expenses is a $7.3-billion (28.0%) jump in livestock and poultry purchases. Miscellaneous expenses (which include items like animal health/breeding expenses, contract production fees, irrigation water, and general production/management expenses) are slated to rise $4.6 billion (13.8%). Other components that contribute significantly to the increase in expenses are total labor expenses ($2.1 billion); net rent to nonoperator landlords ($1.9 billion); marketing, storage, and transportation ($1.7 billion); real estate interest ($1.3 billion); and fertilizer ($1.0 billion). Feed expenses are expected to fall $2.9 billion in 2014.

The two major livestock-related expenses — feed and livestock/poultry purchases — are expected to move in opposite directions, resulting in a net increase of $4.3 billion (4.9%). The projected decrease in feed expenses and the increase in livestock and poultry purchases are both primarily the result of price changes. Despite a drop of 30% in average feed grain prices since the beginning of 2014 and the likelihood that they will drop further in December, the annual average feed prices-paid index is forecast to fall only 2.0%, because prices for other types of feed have not fallen as much. In particular, prices for complete feeds — which carry the heaviest weight in the feed prices-paid index—were almost exactly the same in October as in January, and should rise 2% for the year. Livestock and poultry purchases are being driven by a predicted 38% increase in the annual average price for feeder steers as a result of the tight inventory of cattle and strong demand for cattle as a result of lower feed prices and high retail prices for beef.

The three major crop-related expenses — seeds, fertilizer, and pesticides — are expected to increase a combined $1.8 billion (2.8%). U.S. planted acreage in 2014 is forecast to rise 1.1% from 2013. Prices for seeds and pesticides are up slightly. The annual average price for fertilizers is expected to be largely unchanged from 2013. Fertilizer prices were below last year’s prices through July but have since risen above them. Although they will fall off seasonally during the second half of the year, fertilizer expenses are expected to remain above last year’s prices through the end of the year. The increase in planted acres, coupled with a slight increase in annual average fuel prices, is responsible for the rise in forecast fuel expenses.

Employee compensation (hired labor) is expected to increase $2.0 billion (7.2%) in 2014. Since declining in 2011, hired labor expenses will have risen 33%. Total labor expenses (including contract labor) are also expected to climb $2.5 billion (7.7%) in 2014 due to a predicted 1.4% increase in wage rates and a rise in total output. Output is expected to be up on vegetable, greenhouse/nursery, and dairy farms — farms that typically employ a large share of the sector’s hired laborers.

Net rent to non-operator landlords is forecast to increase $1.9 billion (10.9%) in 2014. Cash rent is forecast up, based on a small increase in total real estate values and higher planted acreage. Share rent is forecast down following the expected decrease in the value of crop production. Government payments and crop insurance indemnities received by landlords are a consistent portion of sectorwide payments and indemnities. Government payments to landlords and crop insurance indemnities received by landlords are expected to both be lower in 2014.

• Assets: The rate of growth in farm assets is forecast to diminish in 2014 (2.4%) compared to recent years. The slowdown in growth is a result of lower net income leading to less capital investment, and moderation in the growth of farmland values. Farm sector debt is expected to increase 3.1% increasing more than assets for the first time since 2009. Most of the anticipated increase in debt is for nonreal estate loans with lower income spurring demand for operating funds. Despite the anticipated higher debt, the historically low levels of debt relative to assets and equity reaffirm the sector’s strong financial position.